Green Mountain Coffee Roasters (Nasdaq: GMCR ) and I go way back.
I bought my wife a Keurig machine four holiday seasons ago. We upgraded it to a newer model earlier this year.
I recommended Green Mountain to subscribers of the Rule Breakers growth newsletter service at a split-adjusted price of $8.93 a little over two years ago. I also made a bullish call on Motley Fool CAPS in 2009, and I'm certainly not going to back out of that call now.
However, on Friday -- once the egg timer goes off on our trading restrictions -- I plan on becoming a shareholder as well.
Contrary to popular belief, I'm not running into a burning building. After years of roasted seasoning I feel I know the company reasonably well. I'm comfortable with the bearish knocks, especially at these prices. I can appreciate the potential catalysts that few are discussing.
Let me go into a few of the reasons why I plan on buying the very shares that you'll be selling later this week.
However, I can't escape what I see with my own eyes. Keurig K-Cup portion packs continue to amass greater shelf space and show up in a broader array of retailers. The big beans -- Starbucks (Nasdaq: SBUX ) , Dunkin' Brands (Nasdaq: DNKN ) , and Swiss Miss parent ConAgra (NYSE: CAG ) -- have all hit the market with K-Cups since this summer.
None of this dismisses the cash flow, accounting, and inventory concerns that have weighed down the shares, but those knocks are either overblown or easily overcome with a booming business model.
2. The patent concerns are real but not fatal.
It's true that two of the company's most important Keurig patents -- the ones pertaining to the K-Cup product -- do expire in late 2012. Companies like Peet's (Nasdaq: PEET ) that have stood on the sidelines or private label giant TreeHouse Foods (NYSE: THS ) that was accused of marketing unauthorized portion packs last year will be free to jump in without paying Green Mountain a penny.
Financial terms of the deals inked by Starbucks, Dunkin', and others aren't public but those relationships may very well change when Green Mountain still has the keys to the brewers but not the refills.
It's not an ideal situation for Green Mountain, but it's also not the end of the world.
Green Mountain has often been compared to the razor-and-blades model, where grooming companies sell their razors at cost -- or less -- and make it up with high-margin proprietary blade sales. What will happen here? Will Green Mountain boost prices on its brewers, inking licensing deals on better terms? K-Cups should get cheaper in this environment, so the brewers should become even more popular.
The game doesn't end here, though.
Keep in mind that Green Mountain plans to roll out a novel platform this new fiscal year ending in September. CEO Larry Blanford provided few details on the machine, but emphasized that it will be a premium platform based on new patents. Green Mountain will continue to support the K-Cup after it goes off patent. It doesn't have much of a choice given its popularity and the shrewd fact that Green Mountain has spent the past couple of years snapping up the companies behind the best-selling Keurig coffees.
However, the premium emphasis with the new portion packs that will brew richer java will also keep its current partners -- Starbucks in particular -- close. Green Mountain also continues to work with Italy's Lavazza on an espresso system, though that's not likely to hit the stateside market before the next generation of Keurig brewers.
3. Green Mountain is cheap.
Analysts have tweaked their price targets lower during the maelstrom, but they have largely stuck to their estimates. Even after last week's uninspiring report, Wall Street sees Green Mountain earning $2.62 a share this new fiscal year, rising to $3.87 in fiscal 2013 despite the patent expirations at the tail end of fiscal 2012.
Is a company that grew its net sales by 95% in fiscal 2011 and targeting a 60% to 65% top-line surge in fiscal 2012 really worth just 16 times this new fiscal year's projected profitability and less than 11 times next year's forecasted earnings? Starbucks, Caribou (Nasdaq: CBOU ) , and Peet's are fetching 24 to 32 times fiscal 2012 income estimates, and they're all growing at substantially slower clips than Green Mountain.
Underappreciated and cheap aren't the usual hallmarks of growth stocks, but it certainly fits the bill -- or cup -- here.
If you want to follow this caffeinated saga, add Green Mountain Coffee Roasters to My Watchlist.